At OptionsProfits we have posted a Retail Investor Series that explains the benefits of the CBOE Mini-Option Contracts, a product that is launching March 18. Below are the links to all the articles in the series.
Now that we have examined how to use the mini options with a stock position, let's briefly discuss ways to produce income without holding stock, ever. Trading options, without a stock position, is how many active option traders use to create wealth. These traders are certainly active, but in many ways take less risk that those who trade covered positions.
The short call and put spread (sometimes called a 'credit spread') is probably the most common premium selling method traders use. Traders that are bullish on a stock will sell a put that is out-of-the-money by 5%, or so. Then as a hedge, rather than holding cash in reserve, the trader will buy a put that has an even lower strike price. While this reduces the net credit on the trade, it also will reduce the amount of margin a you need to put up and the position is now 100% risk controlled.
For example an April 400 put sold in Apple (AAPL) would carry a margin of around $900 for one mini contract and would collect $56 of premium. Or, you could sell five of the 400/390 put spreads collecting $64 and would have a margin of about $420. That's right, greater credit for less margin.
A trader that is bearish on a stock could execute a very similar trade. You would sell a call that is about 5% out of the money and then buy a call that is even further out of the money against it. We at Option Profits have been a touch bearish on Amazon.com (AMZN) for some time (we finally gave up after eating dirt on a trade twice). One way to potentially get short would be sell the 280/285 call spread in April collecting $18.50, or so. The margin on that trade would be about $31.50 per spread, which is significantly cheaper than shorting a call naked.
There are many other combinations that we use at OP to create wealth without holding a security.
All of these strategies can give traders exposure to an equity without actually carrying the stock. While this sounds great, we suggest NOT starting off with complex spreads. Start trading mini-options using cash secured methods. Get a feel for how options move, how they price and how one can make or lose money. Once traders have that down, they can start dipping their toe in the water on complex spreads. The key is, as Jim Cramer always says: Put the Time In! Speaking of Cramer...check out his video with Russell Rhoads of the CBOE as they walk through some strategies the home gamer can use to more effectively manage positions with minis:
For too long it has been difficult for smaller retail traders to execute thoughtful hedging, income generation strategies and directional plays on good companies using options. Now that the mini options have been listed small investors finally have access to options on some great companies and ETFs.
OptionsProfits can be followed on Twitter at twitter.com/OptionsProfits
Mark can be followed on Twitter at twitter.com/OptionPit
EXCLUSIVE OFFER: Jim Cramer's Protégé, Dave Peltier, only buys Stocks Under $10 that he thinks could potentially double. See what he's trading today with a 14-day FREE pass.